Report 2011-120 Recommendation 1 Responses

Report 2011-120: California Department of Transportation: Its Poor Management of State Route 710 Extension Project Properties Costs the State Millions of Dollars Annually, Yet State Law Limits the Potential Income From Selling the Properties (Release Date: August 2012)

Recommendation #1 To: Transportation, Department of

To ensure that it collects fair market rents for the SR 710 properties on the State's behalf, Caltrans should, using the fair market rent determinations for all SR 710 properties it recently prepared and excluding those in its affordable rent program, adjust the tenants' rents to fair market after providing them with proper notice.

Annual Follow-Up Agency Response From October 2016

Caltrans continues to implement rental rate adjustments as previously described. However, because the rental market rates in Southern California continue to escalate at a fast pace, fewer tenants are at fair market rent. In October 2015, District 7 had 115 tenants paying fair market rent. This number decreased to 46 tenants because, during the most recent rental rate evaluations, the fair market rent escalated sufficiently so as to move a large number of tenants to the "below market rent" category. Additionally, the total number of properties rented with the potential of eventually being rented at fair market rent increased from 206 in 2015 to 254 currently. This number increased because some tenants no longer qualified for the Affordable Rent Program; consequently, they were moved out of the program, but were moved to a rent level "below fair market rent." Attachment 1 shows examples of properties with rent increases from 2015 to 2016.

Of the 208 tenants currently paying less than fair market rent, there are 93 tenants whose rent is within 25 percent of fair market rent. These tenants will have annual increases of 10 percent annually. Seventy-nine tenants are between 25 and 50 percent below fair market rent and 36 tenants between 50 and 87 percent below market rent. These tenants will have their rent increased twice per year until they are within 25 percent of market rent. It should be noted that the majority of tenants will take longer to get to fair market rent if rental market rates continue to escalate.

Finally, District 7 has 111 tenants in the Affordable Rent Program, which is a decrease from the 175 tenants in the program in 2015. The decrease stems from some tenants no longer qualifying for the program, as mentioned above, and other tenants who moved out of the properties.

California State Auditor's Assessment of Annual Follow-Up Status: Fully Implemented

Caltrans has implemented a process to increase rental rates to fair market value for all tenants not in its affordable rent program. Our review in May 2017 of Caltrans' process for raising rents to fair market rates found significant improvements, including the use of a tracking system and dedicated staff to ensure rent increases are timely and accurate.

Annual Follow-Up Agency Response From September 2015

Caltrans continues to implement rental rate adjustments (increases and decreases) instituted with the first wave of rental rate adjustments on March 1, 2013. The ultimate goal is that all rental rates are gradually adjusted to fair market rent or the Affordable Rent Level, if applicable.

Rent increase cycles continue to take place on April 1 and October 1 of each year, and notices are sent to affected tenants sixty days or more before their rent increase becomes effective; the most recent rent increase notices were sent to tenants in August 2015 to be effective in October 2015. Currently, there are 89 tenants out of 206 (which excludes 175 tenants in the affordable rent program) paying fair market rent. As of October 2015, there will be an additional 26 tenants paying fair market rent. Of the remaining 91 tenants, 82 are less than 25 percent below fair market rent and are expected to be at fair market rent within the next cycle of rent increases. The remaining 9 tenants will continue to see incremental rent adjustments until their rent is also at the fair market rent. One other circumstance to consider is that, in general, fair market rent has appreciated since the audit report was issued, thereby further delaying the achievement of having all relevant tenants paying fair market rent.

Evaluation of the last two adjustment cycles revealed that although all market rental rate evaluations were completed in a timely fashion and a number of increases were indicated as completed, a group of rental rate adjustments were inadvertently omitted and not entered into the Right of Way Property Management System. The missing group includes ARP and market rate tenants, and Caltrans is taking steps to adjust these tenancies within the October 1 cycle.

Caltrans is in the process of implementing a File Maker Pro system to track rental rate adjustments and continues to strive toward assurance that tenants are paying fair market rent as appropriate.

California State Auditor's Assessment of Annual Follow-Up Status: Not Fully Implemented

Annual Follow-Up Agency Response From October 2014

As previously stated, Caltrans implemented the rental rate increases as of March 1, 2013, and rental rates are being gradually raised to fair market rent or to the Affordable Rent Level, whichever is applicable.

The tenants whose rent is more than 25 percent below fair market rent are subject to 10 percent rental rate increases every six months. The tenants whose rent is less than 25 percent below fair market rent are subject to annual rent increases of 10 percent. However, per the Affordable Rent Program (ARP) regulations, tenants in the ARP whose rent is below fair market rent or the Affordable Rent Level are now being increased on an annual basis only, based on yearly income calculations.

Rent increases are effective annually in April 1st and October 1st. Notices are sent to tenants sixty days or more before their rent increase becomes effective. The most recent rent increase notices were sent to 49 tenants on August 2, 2014, to be effective in October 2014. As of September 2014, there are 43 fair market rent tenants who received semi-annual rent increases effective October 1, 2014. The remaining six tenants in the rent increase list are on the October 1st cycle for their annual rent increase.

California State Auditor's Assessment of Annual Follow-Up Status: Not Fully Implemented

Annual Follow-Up Agency Response From October 2013

Please refer to our one-year response.

California State Auditor's Assessment of Annual Follow-Up Status: Not Fully Implemented

1-Year Agency Response

As previously stated, Caltrans implemented the rental rate increases as of March 1, 2013, and rental rates are being gradually raised to fair market rent or to the Affordable Rent Level, whichever is lower. The tenants whose rent is more than 25 percent below fair market rent are having their rent increased by 10 percent every six months and the tenants whose rent is less than 25 percent below fair market rent are having their rent increased 10 percent every year. Rental rates for the tenants in the Affordable Rent Program (ARP) are also being increased by 10 percent every six months or every year. However, the benchmark for tenants in the ARP is the Affordable Rent Level or the fair market rent, whichever is lower. Caltrans anticipates receiving $269,055 for the current fiscal year in additional rental income from all rent increases in District 7.

California State Auditor's Assessment of 1-Year Status: Partially Implemented

6-Month Agency Response

Caltrans stated that it completed its assessment of rental rate increases and, on December 28, 2012 sent letters to all SR 710 tenants notifying them of its intent to incrementally raise rents to the fair-market rate effective March 1, 2013. Caltrans stated it is on schedule to implement the rental rate increases.

California State Auditor's Assessment of 6-Month Status: Partially Implemented

60-Day Agency Response

Caltrans stated that it is in the process of assessing rental rate increases to fair market rent and has sent letters to all SR 710 tenants requesting their financial information. Caltrans also stated that, once it completes its analysis of all of the information, it will work with the Business, Transportation and Housing Agency (agency) to determine the best course of action for it and the State. Caltrans anticipates that, after providing the affected tenants with the requisite 60-day notice, rental rate increases will be effective March 1, 2013. (See 2013-406, p. 168)

California State Auditor's Assessment of 60-Day Status: Partially Implemented

All Recommendations in 2011-120

Agency responses received after June 2013 are posted verbatim.